Danone Encounters Continuous Frustration in China and a Murky Future Due to Unsuccessful Litigations

September 9, 2008

BEIJING, Sept. 9 /Xinhua-PRNewswire/ — The Chinese beverage giant Wahaha Group Co., Ltd. stated on Aug., 28 that the court in Xinxiang, Henan province and the court in Shenyang, Liaoning province had dismissed the Non-Compete accusation claimed by France’s Danone Group against Zong Qinghou, chairman of Wahaha Group, declaring that Wahaha had won.

Last April, Danone Group asked for a hostile takeover of Wahaha with a total of RMB4 billion. Wahaha regarded it as unacceptable, so conflicts occurred. Since the end of 2007, the Danone-Wahaha feud was officially filed into a lawsuit. Danone Group has indicted Wahaha and its cooperative partners in France, Italy, the U.S., Sweden, British Virgin Islands, American Samoa and mainland China.

Here, the cases ruled in Xinxiang, Henan province and Shenyang, Liaoning province, are two of a series of lawsuits between Danone and Wahaha. In its declaration, Danone Group accused Wahaha and Zong Qinghou, its chairman, of abusing the power as director and secretly setting up four non-joint venture companies to manufacture products that compete with those made by Danone- Wahaha joint ventures, and illegally using the Wahaha trademark without authorization. Danone regarded such act as a violation to the non-compete clause. Therefore, Danone asked for compensation according to the law and urged Zong Qinghou to resign from his positions in the four non-joint ventures that he is accused of setting up illegally.

After the trial the court ruled that, as Wahaha had no actual production and operation, there was no possibility of default. Moreover, the non-joint ventures were set up at Danone Group’s request of “seeking product processing suppliers for the joint ventures”. These non-joint ventures have made significant contributions to the join ventures rather than harming it. Also, these four non-joint ventures existed before the cooperation between Wahaha and Danone Group, so they are not “set up secretly without any authorization”. According to The Company Law of the People’s Republic of China, Zong Qinghou and Wahaha have not violated the non-compete clause nor have they brought any losses to Danone. Thus, the court did not support Danone’s request and ruled against Danone in this case.

Previously, of the cases between Wahaha and Danone Group accusing each other for violating the con-compete clause, three have already been ruled in Wahaha’s favor. What’s more, the case of Wahaha countersuing Danone for violation of the non-compete clause is still in process in Yichang, Hubei province. According to Qian Weiqing, the attorney representing Wahaha, from Dacheng Law Offices, this case is also very likely to end in Wahaha’s favor.

The eight related arbitration cases are proceeding in the Arbitration Institute of the Stockholm Chamber of Commerce. According to news in the middle of July, the arbitration institute has rejected two of the three temporary requests of Danone Group, but agreed that after Danone Group guaranteed to compensate once it brings losses to the joint ventures, it would order Wahaha to ensure that Danone Group can have access to all joint ventures. At the same time, Danone also failed in its cases in Italy and France. So far, all the ruled cases between Wahaha and Danone have ended in Wahaha’s favor.

Since its entry into the Chinese market at the end of 1980s, Danone has invested heavily in China, building factories and expanding production, with China seen as an extremely important market in its development strategy.

According to the article, “Data on Acquisitions and Control of Chinese Enterprises by Foreign Invested Companies” published on “yidaba.com”, in the past 20 years, Danone has purchased shares of many of the top ten beverage companies in China: 51% of shares of the 39 companies owned by Wahaha Group, 98% of Robust Group, 50% of Shanghai Maling Aquarius Co., Ltd., 54.2% of Shenzhen Yili Mineral Water Company and 22.18% of China Huiyuan Group. It also purchased 50% of Mengniu and 20.01% of Brightdairy. These companies, boasting leaders in its own industry, all own trademarks that are well-known in China.

However, the performance of Danone in China is far from satisfactory. Danone purchased Robust in 2000, the then second largest company in the Chinese beverage industry. Sales of Robust reached RMB2 billion in 1999. After the purchase, Danone dismissed the original management and managed Robust directly. However, as its management was neither familiar with the Chinese beverage market nor flexible tactics required, Robust faced a continuous decline. Its tea and milk products almost disappeared from the market, and its barreled water, which topped the national market, shrank continuously. From 2005 to 2006, the loss was RMB150 million, resulting in mass layoffs.

Also, after taking control of the Shanghai Aquarius Co., Ltd., Danone forced a change in its board of directors. As Danone had a one voting right advantage over its Chinese counterparts, it controlled the right to appoint general managers. From then on, the performance of Shanghai Aquarius Co., Ltd. also declined. It had a share of over 50% in the Shanghai barreled water market from 2001 to 2003, achieving a operating revenue between RMB158 million and RMB165 million and a net profit between RMB3.88 million and RMB11.62 million. After being taken over by Danone, its operating revenue began to fall and its market share in Shanghai shrank.

After the despite between Danone and Wahaha were made public, it was followed by various commentaries in the press. Most of them expressed doubts about the management capability of Danone and dissatisfaction with the hostile takeover. According H&J Vanguard, a Beijing-based consultancy, Danone has been unwilling to expand investment into the join ventures during its cooperation with Wahaha. Wahaha had to set up non-joint ventures to meet the need of production as suggested by Danone. Danone was conservative in the development of new products, which meant the two sides were in constant conflict.

H&J Vanguard also gave an example. The Chinese management suggested to the board of directors in 1998 that cola products would have a bright future in China based on long-term market research and that the join ventures should develop cola products. However, Danone refused firmly in its belief that it is impossible for the joint ventures to compete with Coca-Cola and Pepsi in cola products. Afterwards, the Chinese management had to independently invest in one of its joint ventures to build a carbonated drink production line and produce Feichang Cola. It was not long before Feichang Cola took control of the markets in towns and rural areas in China.

The finance section of sina.com once published a series of articles, pointing out that as Danone is not familiar with the conditions in China and is too proud of its management level, its management made mistakes one after another. These made its performance decline continuously. Compared with Danone, Wahaha is growing and developing steadily under the effective management of the Chinese side. At the end of 2006, Danone unexpectedly asked for a hostile purchase of 51% of the shares of companies under Wahaha which are not in cooperation with Danone at a price of RMB4 billion, below the value of their net assets. But Danone’s intention to purchase was opposed by staff, distributors and suppliers of Wahaha. The article goes on to state that in order to realize its goal, Danone not only engaged PR firms and monitoring companies at high prices to track and monitor, 24 hours a day, but that they also spread unreal information through the media to attack Wahaha and Zong Qinghou, which made millions of people stand up in Wahaha’s favor.

As stated in an article titled “The Process of Danone Engaging Many Agencies to Track Zong Qinghou” published on http://www.ce.cn/ on July, 5, 2007, after failure of the hostile takeover plan, Danone has hired many agencies, such as British G4S Risk Management Solutions, Boss & Young Patent & Trademark Attorneys in Beijing, to track, monitor, take photos and shoot video of Zong Qinghou and Wahaha 24-hours a day.

A poll by the largest Chinese portal website, sina.com shows that there are 463,310 people voting in support of Zong Qinghou, chairman of Wahaha Group, accounting for 85.6% of the voters. There are also 397,813 people voting for Danone’s retreat, accounting for 73.04% of the voters. According to an article named “Danone Expects Quick Quit with Scarce Hope” published on http://www.foodqs.com/, Danone has failed in its serial cases with Wahaha, facing the danger of an overall defeat. At the end of 2007, Danone terminated contracts with its old cooperative partner, Brightdairy. This was perceived as an overall counterattack toward Danone by Chinese companies. With the promulgation of the Anti-monopoly Law this August, Danone was considered to face lots of issues, including the possible accusation of holding an industry monopoly.

According to a report by the French media, the management of Danone is seeking a decent way of officially quit Wahaha, symbolizing that Danone is almost certain to quit Wahaha, even in the Chinese market.

Background:

In 1996, the French company Danone Group, Hong Kong Peregrine Investments Holdings Limited and Wahaha Group signed a cooperative contract, setting up 5 joint ventures together. Of them, Danone holds 41% of shares and Hong Kong Peregrine 10%. After the financial crisis in Asia, Hong Kong Peregrine went into bankruptcy and 10% of its shares were purchased by Danone, giving Danone 51% of the joint ventures. As Danone did not cooperate with the 5 companies under Wahaha Group at the beginning of their cooperation, there have been both joint ventures and non-joint ventures within the Wahaha Group. In April, 2007, Danone asked for the acquisition of 51% of shares of Wahaha’s 5 non-joint ventures at a cost of RMB4 billion, which was rejected by Wahaha Group. Though this was mediated by lots of people including the now French president, Nicolas Sarkozy, there was so much divergence that the negotiations broke up. Then, Danone filed more than 30 lawsuits against Wahaha for violating the contract and illegal use of the Wahaha trademark in countries such as France, Italy, the U.S. and China, indicting Wahaha Group worldwide. So far, all the ruled cases both home and abroad have ruled against Danone.